It’s hard to find much cause for hope these days. The headlines tell us every day about tectonic shifts in our economic landscape. We read about layoffs spiraling into the millions, major institutions crumbling, government bail-outs of unprecedented proportion. Just one example of the doom and gloom: David Brooks on today’s NY Times Op Ed page, describes the situation as a psychological crisis rather than an economic one, a crisis potentially so bad that no amount of money thrown at the problem will fix.
In this media-driven echo chamber, it’s hard to hear many sober, let alone optimistic, voices. Dr. Jim Smith may be one such. He was the keynote speaker at a major builders’ trade show in mid-2007 and accurately predicted both the looming recession – though not its depth – and a Democratic win as a result.
His current prognostications are less dire than most. According to an article in today’s Wall Street Journal, he sees GDP of 4% by year’s end. There’s no more than a one line quote in the WSJ, but I was able to find more details in an economic forecast he wrote at the end of 2008 in his capacity as Chief Economist for the wealth-management (the latest oxymoron?) firm, Parsec Financial. (Smith is also a professor at Western Carolina University’s Institute for the Economy and the Future) and a former co-chair of the European Council of Economists.)
Here are a few highlights. You can download his full forecast here.
• The unemployment news is bad and is likely to get worse, but oft-quoted comparisons to earlier periods like after World War II are misguided because the national economy is so different. The unemployment picture should start turning around in a few months.
• Like Brooks, he sees a huge crisis of confidence underpinning this melt-down, just as it has underpinned other financial crises. Here’s the takeway: Historically, when huge resources are thrown at financial panics, three things have always happened: The panic stops; stock markets boom; and the real economy soars.
• Things to look for to signal a turnaround: an upturn in housing starts, especially single family units. Next, an increase in new vehicle sales.
• The consensus view is that there won’t be a turnaround in the economy until the summer or fall 2009. He thinks that view is too pessimistic.
I sure hope he’s right. ...
Revised Absorption Chart, but the results are the same, only worse
Thanks, Jean-Claude for making me take a second look at my methodology on my Absorption Chart. I had anticipated your point about the lag between listing dates and sales but had unfortunately gotten the formula backwards in my chart — basically dividing inventory by lagging sales, rather than forward sales: moral of the story: don’t do this stuff at 1 in the morning.) So I redid the chart with the correct formula inserted. (Excel groupies its =4*(AVERAGE(listings month 1, 2, 3)/AVERAGE(sales months 2, 3, and 4)). The data points at the end of the chart are averaged over shorter periods due to the lack of forward data. ...
Supply/Demand: Does it predict price? Maybe not.
Now hold on there, matie! Basic economic theory says more supply than demand, prices will fall, right? Well take a look at this graph. It shows the absorption rate of single family home listings from January 2006 through December 2008 plotted against median prices (click to make it bigger):
“Absorption” is basically the number of weeks it would take to sell all the homes available on the market based on the number of homes that are selling at that time. (I’ve tweaked the formula to diminish the spikes caused by the huge seasonal dropoff in new listings each December/January.) There are many ways to calculate absorption, but the basic idea is simply to capture how quickly demand is eating supply. Less time to absorb the supply should reflect a “hotter” market where sellers can demand top dollar. A higher absorption rate, on the other hand, means that there’s relatively more listings on the market than demand for them. That would tend to suggest a buyer’s market and softer prices. ...
The View from Space — Part 3: Above California
The forecast for the California Housing Market
The View from Space — Part 2
More pearls from Ken Rosen and the other big brains who addressed UC Berkeley’s Annual Real Estate and Economics Symposium on Monday:
• What to Invest In Now: Rosen and several other commentators say that REITS (publicly traded companies that invest in investment-grade real estate) are cheap relative to their underlying assets. Some are trading at around 50% of the replacement value of the assets they hold and are paying a dividend of around 10%. The best sector of the real estate market right now is the apartment rental market. (Makes sense, since a lot less people can afford to buy homes.) So look for REITS that own big apartment complexes in decent market areas (see below). Do your homework: be sure that they have good management teams and don’t have too much short-term debt because refinancing anything is going to be tough for a while. Hedge your bets. (Easier said than done for us mortals down here on planet earth.) Rosen has parked his cash in short term Treasuries. Obviously he’s worried. We should probably be too. ...
The view from space — Part 1
Ken Rosen is a smart guy. He’s the co-chair of the Fisher Center of Real Estate and Urban Economics at the Haas School of Business at UC Berkeley and the investment advisor of choice to some of the biggest players in real estate, from banks to insurance companies to REITS.
Once or twice a year I spend the day in a windowless hotel conference room listening to Ken and some of the biggest heads in the real estate biz expounding on the state of real estate. These guys (and they are mostly guys) look at real estate through the lens of global macro-economics and international finance. Want to know where interest rates are going? They study yield curves on T-Bills and monetary policy in the capitals of Europe. This is “the view from space.” ...